May 18, 2011 / 12:19 PM / 6 years ago

UPDATE 4-North American Energy breaches covenant, may post loss on writedown

* Sees C$40-C$45 mln writedown on Canadian Natural contract

* Expects full-year profit to be reduced by C$30-C$34 mln

* Says not in compliance with certain covenants

* Stock plunges 27 pct, top pct loser on TSX (Rewrites throughout with details, analyst comments, updates share price)

By Bhaswati Mukhopadhyay

BANGALORE, May 18 (Reuters) - Canada's North American Energy Partners Inc has breached its financial covenants and is likely to post a loss this year on the back of a writedown on a contract with Canadian Natural Resources Ltd .

North American Energy's stock plunged 27 percent to close at a 15-month low of C$7.29 on the Toronto Stock Exchange. It was the biggest percentage loser on the exchange.

North American Energy, which provides mining and pipeline installation services to oil sands operators, will take the writedown due to a halt in production at Canadian Natural's Horizon project in Alberta after a fire in early January.

It has been working on the project with a zero-profit margin, which will hurt its cash flow down the line, North American Energy CEO Rod Ruston said on a call with analysts.

"Given the fact that it is an issue that has been known from a company's perspective for quite some time, investors would be questioning management's credibility," said Maxim Sytchev, an analyst with NCP Northland Capital Partners.

CEO Ruston did not specify for how long the company would operate with a zero-profit margin. However, Canadian Natural, the country's largest independent oil explorer, expects output at the project to return to half of normal levels in early July.

"We will find out in a couple of months whether this is a temporary blip in the company's history or whether it is something more permanent," analyst Sytchev said.

The 10-year contract, valued at about C$1.3 billion, was North American Energy's biggest, and accounted for a fifth of its revenue for the 12 months ended Dec. 31, 2010.

North American Energy expects the writedown of C$40-C$45 million ($41.1-$46.3 million) in the fiscal year ended March 31, 2011. Its net income for the period will be reduced by C$30-C$34 million.

Analysts were expecting 2011 profit to more than halve to C$11.60 million, according to Thomson Reuters I/B/E/S. Including the writedown, the company will now likely post a loss.

COVENANT WOES

North American Energy said it was working with its lenders to obtain an amendment on certain covenants and so far the lead bank in the lending syndicate has granted conditional approval of a waiver.

The company's cash balance as at Dec. 31, 2010 slumped nearly 100 percent to C$0.7 million, with about half the amount spent on refinancing some senior notes. North American Energy had long term debt of C$290.7 million at end-December, according to Thomson Reuters data.

The contract, which was signed in 2005, included a provision to adjust pricing based on certain escalation indices to reflect changes in economic conditions over the term of the contract.

The market was not anticipating that the contract would be done on such unfavourable terms, said analyst Sytchev, who downgraded North American Energy's stock two notches to "sector underperform."

The companies have set up a working group to identify the indices that reflect inflationary conditions that have occurred in the market and expect a recommendation by end-August.

If the two companies cannot reach an agreement, a further writedown of up to C$72 million may be required.

Canadian Natural has the ability at any point to terminate the contract, North American Energy CFO David Blackley said.

Cash flow at North American Energy, which also has contracts with Suncor Energy and Syncrude Canada, is expected to be pressured as working capital needs grow due to activity ramp-up, the CEO said. ($1 = 0.972 Canadian Dollars) (Additional reporting by Scott Haggett in Calgary; Editing by Sriraj Kalluvila, Savio D'Souza)

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